[3 Must-See Charts] Tracking a Tech Stock Meltdown
Investors entered the first week of the fourth quarter with renewed optimism.
The major averages were creeping back to all-time highs. The Dow Jones Industrial Average led the way as the blue-chip index pushed toward 27,000 for the first time ever. It looked like nothing could stand in the way of a powerful melt-up rally…
That’s when some cracks first appeared under the surface of the major averages.
While the Dow posted new highs earlier this week, traders started to dump some of the market’s hottest stocks. Sellers celebrated the beginning of October by tearing down popular momentum names one by one. Tech stocks, recent IPOs, small-caps, biotechs, and retail stocks all experienced sharp reversals.
What started as a stealth correction suddenly spread to the broad market. The Nasdaq Composite fell more than 2% in Thursday trade before recovering some of its losses before the closing bell. The Dow and S&P also finished deep in the red as the selling spread to all corners of the market.
Are we simply experiencing a hard reset after months of smooth sailing? Or is a bigger correction brewing?
Let’s go to the charts to find out…
1. Volatility returns to the markets
Just last week, we noted that the S&P 500 hadn’t posted a 1% daily move (higher or lower) in three months. Stocks had churned higher since early July without any major resistance from sellers.
That calm looks like it’s finally breaking following yesterday’s sell-off. No, we haven’t seen that 1% slide in the S&P just yet. But that didn’t stop the VIX from blasting higher by as much as 30% during Thursday’s session.
The fear gauge finished the day up more than 22%. And stocks are the only assets spooking investors right now…
2. A beatdown in bonds
As stocks get volatile, all eyes are on the bond market as we approach the end of the trading week.
Bonds are cratering, pushing 10-year Treasury near 3.2%. That’s their highest level since 2011.
Now we can start arguing if hot economic data is what’s worrying bond investors…
“The ironic part of it all is that these concerns all stem from what is, at its core level, burgeoning economic growth in the US. But it’s for that very reason that the Fed wants to remove the unprecedented safety net it placed under markets after the financial crisis a decade ago,” Business Insider reports.
“At the end of the day, the Fed letting the market stand on its own two feet may be a short-term negative for the risk assets that have swelled in value under its policy. But it must be done, and we’re finally getting a taste of how it might play out across global markets.”
3. Whatever happened to profitable IPOs?
Despite the market action we’ve seen this week, investors have demonstrated they’re starving for new listings.
One glance at the IPO landscape shows that investors are willing to take risks on new companies that have yet to figure out how to book profits…
“About 83% of U.S.-listed initial public offerings in 2018’s first three quarters involve companies that lost money in the 12 months leading up to their debut, according to data compiled by University of Florida finance professor Jay Ritter,” The Wall Street Journal reports. “That is the highest proportion on record, according to Mr. Ritter, an IPO expert whose data goes back to 1980.”
Of course, the large number of unprofitable IPOs has some pundits worried. The last time we saw this high a percentage of unprofitable new stocks was 18 years ago, right before the tech bubble imploded.
But so far, profitability concerns haven’t hurt returns. TechCrunch notes that on average, these money-losing IPOs are up an impressive 36%.
Like any trendy investing strategy, buying unprofitable new stocks will work… until it doesn’t.